Siddharth Shankar Advisor The future of the euro: Possible destinations and ways of getting there

LAGPAT NAGAR, India - May 21, 2013 - PRLog -- The euro is the second largest reserve currency as well as the second most traded currency in the world after the United States dollar. As of March 2013, with almost €920 billion in circulation, the euro has the highest combined value of banknotes and coins in circulation in the world, having surpassed the US dollar. Based on International Monetary Fund estimates of 2008 GDP and purchasing power parity among the various currencies, the eurozone is the second largest economy in the world.

The euro is managed and administered by the Frankfurt-based European Central Bank (ECB) and the Eurosystem (composed of the central banks of the eurozone countries).

The euro zone has faced significant challenges in 2012.

Is Euro currency fundamentally flawed?

The  start of the sovereign debt crisis  has brought into the spotlight fundamental flaws in the construction of Europe’s Economic and Monetary Union – in particular a lack of sufficient adjustment mechanisms to cope with the diverging performance of its members.

Before the introduction of the euro, countries could potentially balance any loss of

competitiveness due to increases in unit labour costs by a depreciation of their nominal

exchange rate. With no ability to compensate for differences in country-specific price and

cost developments through exchange rate adjustment, EMU needs to rely on other forms

of adjustment, none of which is present sufficiently in the eurozone.

The future of the euro: Possible destinations and ways of getting there

Despite the considerable benefits that membership of the single currency has brought

in aggregate over the past ten years, the crisis has placed a large question mark over

the form EMU might take in the future and what its institutional underpinnings should

look like.

There are four possible scenarios for the future of the euro:

Monetary Bridging: Continued reactive crisis management including

·         Liquidity support packages (e.g. EFSF, ESM)

·         Potentially expanded ECB involvement

Fiscal Pact plus:

·         EMU economic government coordination with emphasis on strict austerity measures.

·         IMF- style monetary support and economic programmers to support structure changes.

Closer Fiscal Union:

·         EMU economic government as long term target.

·         Increased fiscal transfers and taxation on EMU level potentially with jointly issued Eurobonds

·          

Northern Euro/Euro break-up:

·         GIIPS countries leave EMU (Greece, Ireland, Italy, Portugal, Spain)

·         Remaining countries adhere to a strict Stability and growth Pact and form new “Northern euro”

Implications of a eurozone break-up

A break-up of the eurozone still appeared to be highly unlikely, given considerable political will to avoid such a development. But we cannot rule outthis possibility. In a break-up scenario, the GDP of the eurozone is expected to decline sharply, and the repercussions of this contraction on companies would be immense. Managers should therefore be prepared and assess the potential implications of a Break-up for their businesses.

A breakup could, at minimum, have an impact similar to the 2008 financial crisis, during

Which refinancing rates increased significantly – to a point at which capital access for some

organizations became impossible. In particular, this meant a drying-up of trade finance

that subsequently led to an unprecedented implosion of cross-border trade in the

final quarter of 2008 and the first half of 2009. Analyzing a company’s value chain can

reveal further issues. For instance, companies sourcing input factors from countries

outside their sales markets would suddenly be exposed to a return of exchange rate

fluctuations. The introduction of capital controls to avoid capital flight from countries

leaving EMU could further complicate the operations of multinational organizations.

Finally, a break-up would certainly trigger long-lasting legal disputes as most contracts

are not designed for such an eventuality.

What are the future prospects of the European Union?

As it is clear the integration is not in the high level as it anticipated by the founders of the Community. Although the states of the European Union (EU) have achieved to reach a supranational level of integration in economic issues, some policy areas such as common foreign and security policy are in the intergovernmental level. At the same time, the policies involving heavy government expenditure likely education, health, social welfare are applied in the national level.

These are the main questions that concern the policymakers of the Union. There is need for the consolidation of the integration in the EU. For the consolidation of the integration the Union has defined several purposes that together are summed up as the future prospects of the EU.

Future prospects of the EU are consolidating of the euro, managing flexibility and enlargement which are considered crucial points for the future development of the integration in EU.

As mentioned above, one of the future prospects is consolidating the euro which will enhance economical integration among the European nations.

Another prospective area is the strengthening the common foreign and security policy.

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